Now is a good time to gather information to convert cash statements to accrual income and expense statements, says a provincial farm business management specialist.
Most farmers still report incomes and expenses on a cash basis to reduce — or postpone — taxes, said Dean Dyck.
“Very few actually have an accurate accrual statement prepared to give them a true picture of profitability, and if their farm made a profit,” he said.
“Accruing your income and expense statement also gives you the information so that you can drill down and really know your cost of production. It allows you to reflect on those decisions you made during the last cropping season, and to see if they generated a profit.”
But with the right information at hand, you can convert cash statements to accrual ones.
“This information is invaluable in developing your projected income statements and marketing plan for 2019. It will allow you to make better decisions into the future and fully understand your cost of production.”
This includes having precise break-even points to be used when marketing and adopting risk management tools to protect profits.
Items that will affect the calculations are year-end numbers for inventories of livestock and crops for sale; feed on hand; purchased supplies; accounts receivable; accounts payable; and accrued interest.
“Most farmers will have these numbers available either from the year-end statement that they provide to their banker or accountant or from their annual AgriStability returns.”
The only number that may not be readily available is the accrued interest at year-end, so he says that number can be requested or calculated.
“Producers need to have the required numbers for the beginning of the year and end of the year for the accrual adjustments to be calculated properly for any given year. 2018 year-end numbers become 2019 beginning-year numbers. Ask your accountant or business adviser to assist you in accruing your cash statement.”
Depreciation is the tricky one, said Dyck.
“Income tax returns may have capital cost allowance (CCA) numbers, but those can be quite different from the actual depreciation numbers that should be charged as a business expense,” he said. “For the historical accrued net farm income numbers to be meaningful, depreciation amounts must reflect true depreciation of the assets used to generate an income.
“This may be close to 16 per cent for your equipment line and two to four per cent for your grain and machinery storage. If you are in an intensified livestock operation, depreciation on building and equipment could be higher.”
Having a true picture of a farm’s profitability is the first step in planning for investments and long-term tax strategies.
To learn how to accrue income and expense statements, Google ‘Farm Manager Homepage’ or call the Albert Ag-Info Centre at 310-FARM (3276).